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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (10262)	8/6/2004 12:59:10 PM
From: mishedlo	Read Replies (3) \| Respond to of 116555

a possible watershed? Post from Heinz AKA pater tenebrarum [mish note - several news posts and addendums from Heinz and others but this is the key one. I suggest reading them all. Here is the link... worldmarket.blogspot.com] a possible watershed? today's extraordinarily weak unemployment report contained some valuable information. for instance, 25,000 jobs were lost in finance - a sign that the beginning slowdown in the housing credit bubble is biting. this comes after a strong decline in the refi index, see the charts by contrary investor posted in their article on the housing situation here: safehaven.com also, knowing that BLS tends to downplay bad news with its birth/death model as long as the economy is deemed to grow as measured by the GDP, and considering that the biggest employment growth was in health care services, this report is even worse than it looks at first glance. but potentially more important is the market's initial reaction to this report. SOME markets (government debt, gold) have reacted to the likelihood that the Fed's much heralded rate hike cycle is now likely to be postponed or cut short as one would expect, with a big rally. but surprisingly, the stock market has reacted as it would if it harbored renewed recession and deflation fears. in short, the stock market isn't really buying the 'recovery' story anymore. here's a caveat however, the sectors that are deemed to gain from lower interest rates (banks, housing) have not been exactly weak - so there's a residual belief that lower rates could revive the housing finance sector. there's a chance the stock indices will reverse during the day's trading (bad news that were anticipated by the market often produce intraday reversals), but i still deem the initial reaction to be an important hint that the market's views are undergoing an important change. in this context note that i for one believe that a revival of the refi craze via lower rates is NOT assured. it is a hallmark of a deflationary era that eventually, a breakdown in the credit transmission system renders lower rates impotent - one only needs to look at Japan's example. once the real estate bubble was showing the first significant cracks, a campaign to lower rates failed to re-ignite it. and one would do well to remember that Japan's RE bubble was deemed to be unassailable for a long time - the reason given was the 'shortage of land'. we have numerous examples of obvious 'shortages' leading to a bubble-like blow-off and subsequent collapse. e.g. the shortage of DRAMs in late '99, or more recently, the shortage of residential real estate in the US, which is being trumpeted regularly as the main reason why house prices 'can't possibly decline'. however, developers have an unfortunate tendency to believe their own PR-BS right at the top of every housing cycle, so they can be counted on to sit on quite a lot of supply at exactly the wrong moment. note that due to the time lag involved (it takes time to build houses) , the bulk of fresh supply tends to hit the market when it has ALREADY BEGUN to turn down. today should be marked on the calendar - as a 'potential watershed day' - the day the market mind abandons the 'reflation story' and begins to go back to the worries of '01 and '02. of course there's no guarantee that this was it. but if not today, this watershed WILL imo happen in the not-too-distant future and just to be safe, the bears should perhaps look in the attic for various previously discarded round-number party hats. posted by pater tenebrarum at 10:58 AM